Cannabis Drives Up Canadian Retail Rent

Posted Oct 22, 2018

17 OCT 2018|GARRY MARR

Tenants Offer Cash, Stock Options Amid Expected Domestic and US Tourist Demand

Even before online cannabis sales began across Canada on Wednesday, real estate firm RE/MAX said demand from the marijuana industry had already started turning places like Edmonton, Alberta, and Kelowna, British Columbia, into commercial real estate "hot spots" expected to drive sales into 2019.

In the country's most populous city, Toronto, landlords report getting offers from tenants with perks that include everything from 12 months of rent in cash up front to stock options in underlying marijuana companies. And all of these proposed tenancies include rents well above the market, even as much as a 30 percent premium, in anticipation of sales demand from across Canada and from what some analysts say will be U.S. residents embarking on marijuana tourism. 

Jordan Pearl, managing director of the Pearl Group in Toronto, said the mania to sign a lease has been driven by federal regulations that require a physical address to obtain a cannabis license. Retail shop openings vary by province, with Alberta having stores open Wednesday, while Ontario probably won't have them until April.

"People are trying to secure as many locations as they can," said Pearl. "They are just way overpaying for space right now."

In Ontario, the Conservative government in Canada's largest province opened the door to privately run retail cannabis enterprises by scrapping a Liberal party plan for government-managed outlets. 

Pearl said his own experience in renting out a property on Toronto's fashionable Queen Street West led to getting an offer for 30 percent more than market value.

It's not just small landlords interested in cashing in on cannabis. Toronto-based RioCan, the second-largest publicly traded real estate investment trust in the country, has been actively looking at cannabis tenants. Chief Executive Ed Sonshine mused during a third-quarter conference call that marijuana users probably fit into the profile of tenants of The Well, its 7.8-acre office, retail and multifamily development with Allied REIT in downtown Toronto.

"At the risk of making a joke, we are going to have 6,000 tech/knowledge workers at The Well. You think that's a good cannabis location? Probably. We expect premium rents. It's not a big amount of space, but it could be a good contributor," the chief executive said.

Pearl said some landlords are trying to do portfolio deals with cannabis retailers. "They'll give you some good space, but then you have to take the bad space in the middle of nowhere," he said. "It's become a big arms race with brokers running around trying to sign up cannabis retailers. The top brokers are trying to be a little pickier about who they work with."

Brandon Gorman, a vice president at Cushman & Wakefield in Toronto, said his firm has seen about 35 different offers from cannabis retailers over a span of three weeks.

"Cannabis is really more of a destination so [the retailers] don’t need to be at Main and Main," said Gorman. "Some companies are offering warrants that are like stock options and percentage rents" giving the landlord a percentage of sales.

In his 11 years of retail, Gorman said he’s never seen companies offer stock options to secure leases. It is the type of practice that was common during the dot-com boom in the late 1990s. "I mean this is crazy," he said. "It's just totally changing the market right now."

That demand for space is feeding into a solid Canadian retail sector. CoStar data show the vacancy rate in the Greater Toronto Area for the retail sector was 2.9 percent at the end of August, down 0.2 percentage points from a year ago. Out west, Calgary’s vacancy rate was 2.6 percent during that time.

Securing the space is only one problem for would-be cannabis retailers. There now are increasing predictions that the product will be sold out on Wednesday.

Speaking at the International Council of Shopping Centers conference in Toronto this month, Nick Pateras, vice president of growth and international strategy with Lift & Co., a Toronto-based cannabis media and technology firm, predicted there just won't be enough of the product to go around.

"There will be a shortage of cannabis on day one," said Pateras, adding there is only about half of the cannabis in production the market needs.

He said the black market will thrive because of the shortage and pointed to Colorado, where 25 percent of the market goes through unregulated channels. Economists have pointed to spending data for U.S. tourists in Canada to project that Americans will visit with plans to buy and use cannabis during their visit.

On the residential landlord front, the issue for multifamily owners is what do they do about cannabis users on their property and the conflict it might create between tenants.

"We are trying to keep up with ever-changing rules," said Sam Kolias, chief executive of Calgary-based Boardwalk REIT, one of Canada’s largest landlords, which sent a notice to tenants telling them plants could be grown on the premises but marijuana could not be smoked. "The health and safety of every one of our residents is our first and foremost focus." 

The chief executive said Boardwalk is willing to consider individual circumstance with "unique" situations to reverse its position on smoking in apartments.

Tony Irwin, chief executive of the Federation of Rental-Housing Providers of Ontario, which lobbies for landlords, said the issue of cannabis consumption in multifamily units is something all multifamily owners are trying to come to grips with today.

"It is absolutely a concern," said Irwin, adding members worry about plants being grown in units. "I've seen pictures of units destroyed from water damage, and that's not even mentioning the odor from growing that many plants and electricity-use issues if you don't have submetering."

Cannabis, he said, "is something on our radar."

Granite REIT's New CEO Has Eye on Canada

Posted Aug 10, 2018

02 AUG 2018|GARRY MARR

Just a few hours into his new job as chief executive of one of the country's largest remaining publicly traded industrial firms, Kevan Gorrie offered some clues about where he would take Granite Real Estate Investment Trust.

Gorrie, who headed up Pure Industrial Real Estate Trust before it was taken over by Blackstone Property Partners in a $3.8 billion deal first announced in January, told Bay St. analysts during a conference call that record-low cap rates would not scare him off the Canadian market where Granite already owns 5.6 million square feet of space in 30 properties.

"I hope to be more active in Canada in the coming years," said Gorrie, whose PIRET is said to have traded at a 4.8 percent capitalization rate and ultimately helped compress rates in the sector. Ivanhoé Cambridge later teamed up with Blackstone in the venture, taking a 38 per cent stake in PIRET. "I would call [prices] expensive now, but I did see very strong rental growth in the industrial markets even when I was at Pure Industrial in Toronto and Vancouver," added Gorrie.

The newly minted CEO likes Calgary and Edmonton over the next five years and said they could lead the country in rental growth.

"Even though cap rates may appear to be low, and they are, there is growth potential," he said, adding growth in Granite's estimated $2.8 billion portfolio will also come from development on the REIT's existing holdings. "It's going to continue as Amazon and Wayfair expand their presence, and then the other retailers are catching up and improving their supply chains because of demand from their customers."

South of the border, where the REIT has 27 properties and 11 million square feet, Gorrie still sees room for expansion. "I don't see us halting our growth in the U.S.," he said.

Gorrie said he's not "looking to break the bank" and doesn't see any urgency to deploy some of Granite's firepower but is looking at some opportunities in what he called key markets without naming them.

"We expect to be active over the next 90 days despite the fact we haven't formalized a strategy, and that will include balance sheet deployment," said Gorrie, who said industrial has strengthened across all markets in North America.

Gorrie praised outgoing chief executive Michael Forsayeth and his team for their work -- in particular, efforts in reducing the REIT's exposure to auto parts giant Magna International to under 49 per cent of Granite's gross leasable area.

"I'd like to think I'm leaving Granite in pretty good shape with lots of dry powder and well-positioned for continued success under Kevan," said Forsayeth, who is retiring.

Magna originally spun out its real estate into Granite predecessor MI developments, but the REIT has gradually been reducing that exposure since the auto parts company exited the investment.

"It is certainly a good problem to have when a lot of your income is being delivered by such a creditworthy tenant," said Gorrie about Magna, adding the REIT will continue to rebalance the portfolio and plans to focus on modern logistics heavily.

He said e-commerce can only go so far when it comes to industrial entities. "Light manufacturing and manufacturing have a place in my mind in any good industrial portfolio," Gorrie said. "There is not a portfolio that does not have some of it."

Michael Markidis, an analyst with Desjardins, said more details from Gorrie would be vital to broadening the REIT's investor base.

"Our sense is that Gorrie believes Granite is generally on the right path given the recent progress that has been made in reducing the Magna/special-purpose exposure and allocating additional capital to modern logistics/distribution and warehousing properties," said Markidis in a note to investors.

Editor’s Note: This story was updated to reflect Ivanhoé Cambridge’s 38 per cent stake in Blackstone Property Partners’ takeover of Pure Industrial Real Estate Trust.

Hines Closes on 27-Story First Tower High-Rise in Downtown Calgary

Posted Apr 17, 2018

11 APR 2018|GARRY MARR  Financial Post 

Calgary's hard luck office market isn't scaring off an international real estate firm, which said Wednesday it acquired the 27-storey F1rst Tower even though it is only 51 percent leased.

Houston-based Hines, along with a subsidiary of real estate funds managed by Oaktree Capital Management out of Los Angeles, bought the 708,354-square-foot high-rise in the downtown east submarket of Calgary, and is planning a major redevelopment at the building home to Encana, Telus and TransCanada.

A report this week from CoStar Research noted the overall office market vacancy rate in Calgary fell 30 basis points in first quarter of 2018 from the end of 2017, but is still up 70 basis points year over to 15.3 percent. That rate is expected to climb in 2018 with the delivery of Telus Sky, a 761,235-square-foot, mixed-use tower currently under construction at 7 Ave. SW and Centre St. in Calgary's central core, in 2018. The downtown vacancy rate is more than 21 percent.

Increases in the vacancy rate from a year ago are being driven by new supply and the fact that many tenants that pre-leased space are now putting the space they no longer require on the sublet market, according to CoStar Research. Net asking rental rates fell 1.1 percent in the first quarter from the end of 2017 and 2.2 percent from a year ago to $16.92 per square foot.

In the face of those numbers, Hines and partner Oaktree are pushing ahead with a significant upgrade to the property at 411 1st St., part of the +15-connected office building network that connects the city's core through enclosed walkways. The group is promising a "comprehensive redevelopment" of the 34,000-square-foot +15-level - something it feels will drive tenants to the building.

No price was disclosed on the transaction or how much will be spent on redevelopment.

Syl Apps, managing director for Hines in Canada, told CoStar News that the company has a long-term plan for the Calgary office market that looks beyond the current vacancy rate.

“We are big believers in the city,” said Apps. “The underlying thesis is a long-term bet on the city of Calgary. To some extent, we see the current conditions in the market as an opportunity to allow us to grow our portfolio in a way we might have not otherwise been able to.”

Hines has one other downtown office building in the city, Prospect Place at 505 2nd Street SW, and a handful of other development projects it is currently considering in the city. The development projects are mostly multifamily buildings.

While Apps wouldn’t comment on how much Hines will spend on redeveloping F1rst Tower, he did say the goal is to bring it up to a “Class A building” because the building is almost 40 years old.

He said the property was purchased from a couple of Canadian real estate investment trusts and pricing it today based on vacancy rates probably doesn’t reflect the true long-term value of the asset.

“We want to add value to the asset,” said Apps, conceding in the near-term it will be hard to lease more space in the building.

New space being upgraded will include a tenant lounge/collaboration area, a café and food service area with the possibility for a differentiated food hall concept, an outdoor terrace, a fitness and wellness centre and a modern, flexible conference facility.

Here's what a 27.7% vacancy rate looks like in downtown Calgary

Posted Apr 11, 2018

It's no secret that one result of the collapse of the price of oil four years ago was a dramatic emptying out of Calgary's downtown office towers as energy companies laid off thousands of people and a deep recession took hold in the province. 

Click here to learn more  https://bit.ly/2qnAadf

 

Choice Properties Buying CREIT in $6 Billion Deal to Create Canada's Largest REIT

Posted Mar 14, 2018

Choice Properties Real Estate Investment Trust has agreed to buy Canadian Real Estate Investment Trust in a $6 billion transaction they say will create the largest REIT in Canada with a combined enterprise value of $16 billion.

Toronto-based Choice Properties REIT said it would acquire all CREIT's assets and assume all of its liabilities, including long-term debt for $22.50 in cash and 2.4904 Choice Properties units per CREIT unit, on a fully pro-rated basis.

"We are excited to be creating Canada's leading diversified REIT. Choice Properties' expanded, diversified real estate portfolio, anchored by Canada's largest retailer, will provide unitholders of both Choice Properties and CREIT the opportunity to capitalize on the future growth and value creation opportunities of this strategic transaction," said John Morrison, president and chief executive of Choice Properties, in a statement. 

He told analysts he sees "tremendous opportunity" in the Choice REIT development pipeline. 

"We believe there is meaningful value creation in the portfolio," Morrison said during a conference call to discuss the merger. He pointed to 75 sites that have the potential for additional development. "The combined REIT has more than 60 sites primed for creating exciting residential-focused mixed use development."

The combined entity will have a portfolio of 752 properties made up of 69 million square feet of gross leasable area. Loblaw Companies Ltd. and George Weston Ltd. will have combined proforma ownership of 65%.

"This transformational acquisition leads to the creation of a real estate investment trust with resilient characteristics and adds value creation opportunities to Choice Properties' existing strong portfolio of retail assets," added Galen G. Weston, chairman and chief executive of Loblaw and GWL, in a statement. 

The companies say the combined entity will be Canada's preeminent diversified REIT. The retail portfolio, which will make up 78% of net operating income and is focused on what the pair call "necessity-based retailers" that makeup 85% of the retail assets. Industrial assets will contribute 14% of NOI of the combined REIT with office assets making up the remaining 8%.

Stephen Johnson, chief executive of REIT, said the combination also provides tremendous opportunity for Choice Properties to capitalize on the firms' combined development pipeline to create long-term value. 

"Together, the combined REIT is uniquely positioned to deliver results for unitholders as the owner, manager and developer of a high-quality portfolio of diversified assets," Johnson said in a statement.

In the new combined REIT, Morrison becomes the vice-chairman of the board of trustees while Johnson will become president and chief executive.

Using the Choice Properties closing unit price on February 14, 2018, of $12.49, the deal equates to a price of $53.61 per CREIT unit, a 23.1% premium to the CREIT closing unit price on February 14, 2018. 

The total consideration consists of about 58% in Choice Properties units and 42% in cash. CREIT unitholders will have the ability to choose whether to receive $53.75 in cash or 4.2835 Choice Properties units for each CREIT unit held, subject to proration. The maximum amount of cash to be paid by Choice Properties will be approximately $1.65 billion, and approximately 183 million units will be issued, based on the fully diluted number of CREIT units outstanding.

CREIT's board of trustees has recommended unitholders vote in favour of the transaction. Choice Properties' board has unanimously determined that the deal is in the best interests of Choice Properties.

Michael Markidis, an analyst with Desjardins Capital Markets, said Choice REIT wasn’t really on the radar of institutional buyers, but with the combined entity having a $2 billion public float it will become a viable investment vehicle.

"It’s only a matter of time it goes on the index. CREIT is an index entity and Choice is not because it did not have enough of a float," said Markidis, referring to S&P/TSX composite.

Markidis said while the new REIT will be more diversified, the aggregate investment in retail is increasing. 

"But this will give them a platform to grow the other segments (of the business)," he said, referring to office and industrial classes.

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